Sunday, August 26, 2007

Asian Trade and Consumption (more seriously)

For some time now, I have been wondering if Asia’s economic growth will create a large enough middle class to eclipse the United States as the primary export market it is today. I would often venture that at some point, there could be a major economic event which will bring a paradigm shift in the way that people perceive the US economy’s power. Now, I wonder if the current sub prime crisis and a potential coming US recession will create that event.

First, some data I dug up: Developing countries in Asia imported around $1.4 trillion of goods in 2006, up from $0.5 trillion in 2002 – from the perspective of an exporter of goods any where in the world, that means that the market for imports into the emerging markets of Asia grew from around 43% of the US import market in 2002, to 77% in 2006 – almost doubling in relative size. If we count all of east Asia (including the more ‘developed’ markets of Japan, Singapore, Hong Kong and Taiwan), then that relative market size has increased from 117% of the US market in 2002, to 163% in 2006. (Should some body have been paing attention when the size of the Asian import market surpassed that of the US circa 2000? Or were we all caught up in our own post bubble trauma?)

The Economist also noted recently that “China now takes 22% of the exports of the rest of emerging Asia, up from 13% in the late 1990s.” So Asian economies, heretofore characterized by their power as exporters to the West, are now becoming significant import markets in and of themselves... and thus less reliant on the American consumer.

To date, the power of the American consumer had been such that it seemed like the whole world depended on his/her consumption habits. A recession in the US would be felt by markets all over the world. (A few years ago an American friend had told me, half jokingly, something like this: “The whole world is dependent on the irresponsibility of the American consumer who keeps loading up even more debt on his credit card to buy even more stuff, keeping the world economy afloat.”)

Even though the above data fails to differentiate between consumer goods and say, heavy machinery, the growth and transformation of Asian economies is unmistakable. So today, and if not, in the near future, when the US consumer sneezes, Asia may no longer need to catch a cold.

To some extent, this explains the continued rise in the Asian stock markets, even as European and American markets have gone through significant volatility recently. One would expect a further decoupling of the Asian stock markets from that of the United States over the coming years.

A more important implication of this trend could be the weakening of America’s political and economic position in the world. Today, much of Asia’s foreign reserves are kept in dollars. They are used to buy US government debt, which could be viewed as a rational form of vendor financing. As the non-US consumer becomes a more important part of Asia’s export market, supporting ‘vendors’ across the emerging markets may become more important at the margins. For example, China may decide to shift a small portion of its reserve dollars to buying Vietnamese debt or finance infrastructure there (to help that export market) instead of buying US bonds. Obviously, US reserves can continue to be important for all Asian economies – but the question is: how much will a small shift of attention, and dollars, away from the US, affect the American economy? Will the dollar fall even more precipitously? Will the falling dollar then cause inflation and potential stagflation as US interest rate policy faces conflicts in balancing inflation, growth, and the value of the dollar at the same time? What will it mean for the various sectors of the US economy? The financial sector may benefit from this trend for example, but will a falling dollar hurt the average US consumer even more in the short / medium term as the US economy adjusts to the new structural balance over time? In the mean while, will this trend benefit political populists and economic isolationists - ever ready to pounce from the fringes of the American political spectrum? Would such a political change further delay a real adjustment of the American economy to the new global economic regime? And as Asian economies come to depend less and less on the US, wouldn't American political influence in the region inevitably decrease, creating the possibility of a vicious cycle of all the above conjectures?

For the record, I am a global economy optimist in every way. But one has to wonder what kind of short term growing pain the increasingly global economy will experience as these relative shifts of political economic power take place and each individual economy makes the necessary structural changes to adjust to new market realities.